Tax Planning Strategies for Small Businesses in 2020qeeva
TAX PLANNING STRATEGIES FOR SMALL BUSINESSES IN 2020
According to Wikipedia, small businesses are privately owned corporations, partnerships or sole proprietorships that have fewer employees and or less annual revenue than a regular sized business or corporation. The number of employees in a small business may range from 5-50 employees. Small business can always apply for the government support and also qualify for preferential tax policies governing a certain state or nation. Nigeria’s new financial bill that was signed into existence in October 2019 by the President Muhammadu Buhari will ensure the exemption of small business with an annual turnover of less than N25 million from Company Income tax (CIT). This is one of the favourable government policies that small businesses are entitled to in Nigeria.
Tax planning can be defined as the analysis of the financial situation. The purpose of tax planning is to ensure efficiency and this is done by forecasting the tax liability of the business and sourcing out ways and circumstances that can be used to reduce it. This includes permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so on that are available under a state or a country. It is the amount of limiting the tax payable to the relevant authorities without breaking the law
Although when it comes to payment of tax in Nigeria, small businesses tend to avoid it. A study carried out in Nigeria shows that over 70% of small businesses in Nigeria are not paying their regular taxes to the government. A lot of small businesses in Nigeria has incurred several penalties and interest in addition to the unpaid tax. All of these can be avoided using proper and adequate tax planning strategies to curb out these various exorbitant penalties and ensure minimization of tax payable.
TYPES OF TAXES CHARGED AGAINST SMALL BUSINESSES IN NIGERIA
- Income tax
All businesses whether small or large is liable to pay tax on the income generated. The payment of tax is dependent on the form of business and it is respective to their taxable income. Company income tax is only payable to the federal government annually. The finance bill 2020 which was signed in October exempts small business owners from payment of taxation with an annual turnover of less than N25 million from Company income tax. Although before the finance bill all businesses are liable to a taxable rate of 30% in the country
- Self employment tax
Self employment tax is a type of tax that is charged on individuals who work on their own. Self employment taxes are paid by sole proprietors and partners based on the level of income of the business. The scale of rate for the self employment tax is from a minimum scale of 7% to a maximum scale of 24%
- Value Added tax on products and services
It is charged on goods and services and is collected by merchants in most states and paid to the state department revenue. One of the amendments made by the finance bill that was signed in October 2019 is the increase of the rate of value added tax (VAT) on goods and services from 5% to 7.5%
- Employee taxes
Any small business that employs an individual to work under them is also liable to remit tax from its employees’ salaries. This is also known as the Pay as you earn (PAYE) and it is remitted to the relevant tax authority in a state. This also ranges from 7% to 24% depending on the taxable income
- Capital Gains Tax
This is 10% tax that is imposed on capital gains arising from sales, exchange or disposal of assets. Capital gains are the profit an investor or a business realizes when the capital asset is sold for a price that is higher than the purchase price. Capital gain taxes occur only when an asset is realized or sold.
The following tax planning strategies can be applied in any small business in Nigeria:
- Start early
Fast and precise decisions need to be made regarding tax payment before the year end. This means that proper actions should be taken before the deadline for tax payment or the business will be stuck with the current tax liability. The earlier you start piling up important and relevant information the more time you have to do something about it. Take for example your business is expecting a huge gain from investing opportunities, this will lead to your present year income to be higher than last year income. The result of this will lead to more tax unless proper measures are taken such as putting in some deductions to put the present income to a lower stand point that resembles the past year income.
- Form a Tax Calendar
One of the best strategy of tax planning is by forming a tax calendar. This will enable you to have insight and the ability to forecast by keeping track of your state’s deadline for payment of any type of tax relating to your small business. The owner of the business should mark important days or months in which some taxes are due and it will make you organize important documents and other relevant information. This will ensure that there are no cases of emergencies.
- Hire a Professional or a Consultant
An owner of a small business is responsible for every tax related payment. One way to foster this is to hire a professional or a consultant that will give you all the needed advice and enable your business compliance with all the federal and state regulations. A tax professional is a knowledgeable person on tax matters in a certain state or country and will give the business guidance and methods applicable for tax deductions and policies set in place by the government that your business qualifies for. Tax professionals such as consulting firms, accountants and attorneys are competent enough to help the business needs.
- Proper record of documents and other relevant information
Maintaining documents and other relevant information is cogent when dealing with payment of taxes to a state. Example of such documents that is needed are the income statements, balance sheets, bank statements and the purchase receipts of the business. These documents will be presented to the relevant tax authority for verification
- Track your business expenses
Another important strategy for tax planning is tracking the expenses related to the business throughout the year. By doing this there are certain advantages in the provision that will be available to the business. A business can deduct expenses like business travel, entertainment, car repairs, legal expenses and even employees benefits and payment.
- Proper money management
It is very important for small business to engage in proper money management by ensuring that payment is made when due. Some taxes are due for payment quarterly or monthly and money has to be ready at hand to pay. Small business owners tend to make mistakes by spending money for the running of the business operations thereby leaving nothing for tax payment when it’s due. This will lead to further sanctions and penalties for the business.
- Assess the business tax liability
Tax liability is the amount of tax payable based on the current and applicable laws governing a state or a country. Having knowledge of a certain estimate of the tax payable will go a long way in helping the business to make better decisions by helping you to determine how much to plough back into the business in order to ensure savings for tax.
- Deferring taxable income
Most small businesses employ the cash method accounting for tax purposes. Under this method income is not counted until it is received and expenses is not incurred until payment is made. Taxes can be deferred to the next year and minimize the amount to be paid by an additional year. This is a way of lowering your business current tax payment for the year
- Proper Audit of accounts
Poor record keeping and improper auditing of accounts may lead to higher payment of tax by the business. Small businesses should ensure that an internal auditor is appointed to keep proper books of record. This will ensure that proper records are kept in case there is need for any relevant information
- Make the most of depreciation
Depreciation ensures that there is a loss in the value of a business assets which will be recognized as an expense. This accounting technique can be used to reduce taxable income that a business has to pay. This ensures that the is an offset with the taxable income which will lead to a minimized payment of tax
- Offer Employee benefits
Another way of proper tax planning for small businesses is to offer fringe benefits to employees working under the business. Such benefits ranges from provision of educational assistance, transportation benefits, meals and health benefits. This can also enable the taxable income of the business to be minimized
- Consider Relocating the business
This may be seen as a last resort but it is a very considerate opportunity. For instance, 2 (two) different states Lagos and Ekiti state. Lagos state in this case is collecting five (5) different taxes from the business due to the provision guiding its geographical location while Ekiti state may only be collecting (2) different type of taxes pertaining to the state’s provision. Small businesses may tend to locate to Ekiti state where tax laws are favourable and friendly
- Adopting a type of Business structure
When setting up a small business, it is very important to know the type of business structure you want to adopt depending on the flexibility, complexity, liability and the tax to be remitted to the relevant tax authority in a given state. The corporation pays more tax than the sole proprietor due to their different business structure adopted.
- Business deductions
Business deductions is a tax planning strategy that can be helpful in a number of ways. Business deductions also help to reduce the amount of tax payable for the current year and they include maintenance of machinery and bad debts.
- Deducting charitable contributions
Deducting charitable contributions like giving to the orphanage’s home or helping out the community where your business is located can also be used as a tax planning strategy to help reduce the burden of payment for that year.
- Tax Losses
Small businesses should also check whether there is any tax losses carried forward from prior years. This can be used as a tool to offset the income of the business.
- Use retirement or pension contributions
This is also another efficient tax planning tool. The business can create retirement accounts for its employees and start making regular contributions. At the end of the tax year the owner of the business is liable to deduct the contribution made for the employees from the taxable income of the business
- Arm yourself with good information
As a small business owner, it is very important for you to carry out research on the taxes relating to laws guiding the tax payment of your geographical location. A business may also be required to pay different types of taxes depending on the industry which the business is. A business must invest in basic tax knowledge
- Acquiring and Leveraging on the Pioneer status incentive
A business that applies and is granted the pioneer status incentive will not pay income tax for the number of years stated in the pioneer certificate. The pioneer status ranges from 3 to 7 years.
- Deduct your Auto expenses
Any vehicle or cost in leasing a vehicle used for the business whether in conveying employees, clients and equipment for the sake of the business can be deducted from the taxable income of the business for that year
- Change your year end
This is applicable to businesses that are seasonal or when the profit levels of the business are either decreasing or increasing. It may be worthwhile to change your year end
To efficiently plan and manage their tax affairs small businesses must put in check or adopt the above tax planning strategies as it helps them in eliminating any unnecessary stress, taking full benefits of all available deductions and also help in saving lots of money for the business which can be used for another purpose. At Qeeva Advisory Limited, we have served as tax consultants to small businesses in various sectors. Let us help you implement tax planning strategies for the efficiency of your business organization. For more information on Taxation as a whole in Nigeria, you can contact us on 08023200801, 08075765799, Email: firstname.lastname@example.org
About the author
Onamakinde Dare Daniel is a highly motivated accountant with knowledge in Accounting, Taxation, Management, Audit, Costing and Research. He is keen on tax matters due to its ever dynamic nature.